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Measuring Path Dependency

Author

Listed:
  • Juhasz, Peter

    () (Corvinus University of Budapest, Department of Finance, Budapest, Hungary)

  • Varadi, Kata

    (Corvinus University of Budapest, Department of Finance, Budapest, Hungary)

  • Vidovics-Dancs, Agnes

    (Corvinus University of Budapest, Department of Finance, Budapest, Hungary)

  • Szaz, Janos

    (Corvinus University of Budapest, Department of Finance, Budapest, Hungary)

Abstract

While risk management gained popularity during the last decades even some of the basic risk types are still far out of focus. One of these is path dependency that refers to the uncertainty of how we reach a certain level of total performance over time. While decision makers are careful in accessing how their position will look like the end of certain periods, little attention is given how they will get there through the period. The uncertainty of how a process will develop across a shorter period of time is often “eliminated” by simply choosing a longer planning time interval, what makes path dependency is one of the most often overlooked business risk types. After reviewing the origin of the problem we propose and compare seven risk measures to access path. Traditional risk measures like standard deviation of sub period cash flows fail to capture this risk type. We conclude that in most cases considering the distribution of the expected cash flow effect caused by the path dependency may offer the best method, but we may need to use several measures at the same time to include all the optimisation limits of the given firm.

Suggested Citation

  • Juhasz, Peter & Varadi, Kata & Vidovics-Dancs, Agnes & Szaz, Janos, 2017. "Measuring Path Dependency," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 8(1), pages 29-37.
  • Handle: RePEc:ris:utmsje:0196
    as

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    File URL: http://utmsjoe.mk/files/Vol.%208%20No.%201/UTMSJOE-2017-0801-04-Juhasz-Vardi-Vidovic-Dancz-Szaz.pdf
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    References listed on IDEAS

    as
    1. Kosowski, Robert & Neftci, Salih N., 2014. "Principles of Financial Engineering," Elsevier Monographs, Elsevier, edition 3, number 9780123869685.
    2. François Facchini, 2013. "Economic freedom in Muslim countries: an explanation using the theory of institutional path dependency," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00636998, HAL.
    3. Anna Corinna Cagliano & Sabrina Grimaldi & Carlo Rafele, 2015. "Choosing project risk management techniques. A theoretical framework," Journal of Risk Research, Taylor & Francis Journals, vol. 18(2), pages 232-248, February.
    4. François Facchini, 2013. "Economic Freedom in Muslim Countries: an explanation using the theory of institutional path dependency," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01286717, HAL.
    5. François Facchini, 2013. "Economic freedom in Muslim countries: an explanation using the theory of institutional path dependency," European Journal of Law and Economics, Springer, vol. 36(1), pages 139-167, August.
    6. Frank Wusterhausen, 2015. "An Analysis of Path-Dependent Options," Journal of Optimization Theory and Applications, Springer, vol. 167(3), pages 874-887, December.
    7. Timothy J. Richards & Bradley J. Rickard, 2014. "Patents as options: path-dependency and patent value," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 41(5), pages 817-841.
    8. Robert Hassink, 2005. "How to unlock regional economies from path dependency? From learning region to learning cluster," European Planning Studies, Taylor & Francis Journals, vol. 13(4), pages 521-535, June.
    9. Martin Stack & Myles P. Gartland, 2003. "Path Creation, Path Dependency, and Alternative Theories of the Firm," Journal of Economic Issues, Taylor & Francis Journals, vol. 37(2), pages 487-494, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    risk management; project; firm; financial planning;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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